Company History:

A leading high-technology competitor, Watkins-Johnson Company is a producer of semiconductor-manufacturing equipment and electronic products for the wireless-telecommunications and defense industries. Founded in 1957, Watkins-Johnson emerged as a developer and manufacturer of surveillance, communications, and electronic countermeasure equipment used in covert operations, selling the bulk of its equipment for decades to the U.S. Department of Defense. During the late 1980s, as defense spending began to ebb, the company gradually placed a greater emphasis on the production of semiconductor equipment to lessen its heavy reliance on military contracts. By the mid-1990s, Watkins-Johnson had etched a new identity for itself as a producer of chemical-vapor-deposition (CVD) equipment, which deposits layers of nonconducting dielectrics onto silicon wafers. The company's semiconductor equipment group, which was enjoying robust growth during the mid-1990s, accounted for 60 percent of total sales in 1995, roughly equivalent to the percentage of sales formerly contributed by Watkins-Johnson's military-related business. Of the remaining percentage of the company's sales in 1995, 30 percent was derived from defense-related work, while telecommunications and wireless communications accounted for ten percent.

When Dean A. Watkins and H. Richard Johnson decided to start a new business in 1957, their objectives were clear, their strategy precise. The two men, both established professionals within their field, entered the entrepreneurial fray in December 1957, then spent the ensuing 30 years pursuing the objectives and following the strategy they embraced before their company's first day of business. Both Watkins and Johnson would still superintend over the operation of their company when it began to diversify during the late 1980s, their tenure as leaders encompassing two eras in the history of their company. In each era, the company was regarded as a formidable competitor, its market position underpinned by the technological foundation established by its founders.

Watkins, in the years leading up to the formation of Watkins-Johnson, was working as a professor of electrical engineering at Stanford University, while Johnson was working at Hughes Aircraft Company, where he was head of the company's microwave laboratory in southern California. Together, Watkins and Johnson had the capacity to enter the business world at the highest technological level; their plan was to enter the electronic components field, then the electronic systems field. Specifically, the two founders decided in 1957 to develop and manufacture microwave tubes and microwave solid-state devices, then use those products as a foundation from which to diversify into related electronic systems and equipment devices areas.

After receiving financial assistance from Kern County Land Company, the pair incorporated Watkins-Johnson Company on December 6, 1957, then set themselves to their predetermined task of developing and manufacturing sophisticated electronic devices, principally backward-wave tubes and forward-wave tubes. Backward-wave tubes, which functioned as sources of microwave power, were used in a variety of settings, including electronic test equipment, frequency agile radar missile control systems, and other areas where the generation of an electrically tunable microwave signal was required. Forward-wave tubes, physically similar to backward-wave tubes, were used primarily in microwave reconnaissance and surveillance receiving equipment and in electronic jamming equipment, as well as part of radar systems. Not surprisingly, considering the applications for the company's products, Watkins-Johnson's largest customer was the U.S. Department of Defense, which would purchase the majority of the company's products for decades to come, as Watkins and Johnson transformed their business venture into a leading competitor in the electronic warfare market.

Adhering to their original strategy of first penetrating the electronic components field and then branching out into related business activities, Watkins and Johnson recorded an encouragingly successful first decade of business. Watkins-Johnson was a profitable enterprise in its first year of business, collecting $80,000 in net income from nearly $500,000 in sales. Profits and revenues increased each year thereafter, rising to $3.2 million and $31.1 million, respectively, by the end of 1967, Watkins-Johnson's 10th anniversary of existence. The following year, when stock in the company was traded for the first time on the New York Stock Exchange in June, Watkins-Johnson formed a subsidiary named Watkins-Johnson International to handle its nascent yet fast-growing international business.

Annual sales and profits increased each year during Watkins-Johnson's first decade of business, recording a 31 percent and 38 percent compounded average annual rise, respectively, realizing growth fueled in part by the two acquisitions completed during the 1960s. In 1963, Watkins-Johnson made its first acquisitive move, purchasing Santa Cruz, California-based Stewart Engineering Company, a manufacturer of backward-wave oscillators, devices used primarily in electronic test equipment, and a maker of a line of controlled atmosphere furnaces for the semiconductor industry. Four years later, as annual sales eclipsed $30 million, the company completed the second acquisition in its history, absorbing Rockville, Maryland-based Communication Electronics Inc., a manufacturer of lower frequency reconnaissance and surveillance equipment used principally for monitoring radio communications.

Watkins-Johnson's record of consecutive annual increases in earnings and revenues ended in 1969, when sales slipped 18 percent and profits fell 43 percent. The losses, however, were largely the result of delays in Defense Department funding and not indicative of any debilitative weakness within Watkins-Johnson's operations. The company by this point employed more than 1,250 workers, with its business divided evenly between the production of electronic components and the production of electronic systems and equipment, the business areas Watkins and Johnson had targeted a decade earlier. From a total of three plant locations--one in Palo Alto, California, another in Santa Cruz, California, and a third in Rockville, Maryland--the company developed and manufactured its surveillance, communications, and electronic countermeasure products, the overwhelming majority of which were purchased either directly or indirectly by the U.S. Department of Defense. As Watkins-Johnson entered the 1970s, government contracts would continue to propel the company forward, driving its growth and funding the development of its highly sophisticated equipment.

By the mid-1970s, Watkins-Johnson was generating roughly $75 million a year in sales and controlled between four and five percent of the $1.5 billion electronic warfare market. Earlier in the decade, the company completed its third acquisition, purchasing in 1970 Mountain View, California-based RELCOM, a closely-held manufacturer of precision components such as mixers, frequency converters, transformers, and switches. In the wake of this acquisition, the company fell victim to rising inflation, problems arising from production difficulties, and parts shortages. Its financial health suffered as a result, particularly in 1974, but by the mid-1970s Watkins-Johnson had recovered completely, with its international business demonstrating encouraging growth. Sales outside the United States accounted for 30 percent of the company's total sales by the mid-1970s, up from approximately ten percent during the late 1960s.

By the end of the 1970s, Watkins-Johnson had completed another decade of strong growth. The company, profitable in every year since its founding, was supported by approximately 3,000 employees, four manufacturing facilities, and 15 sales offices in the United States and in Europe. Annual sales were approaching $130 million, driven upwards by the continued patronage of the Department of Defense. Since the company's inception, when tensions between the Soviet Union and the United States were, perhaps, at their most strained level, the Cold War and the specter of global conflict had fueled spiraling defense spending, buoying Watkins-Johnson's business considerably. More than half of the company's business was dependent on the continued rise in military spending, which, as the company prepared to enter the 1980s, appeared threatened under the last years of the Carter Administration. Addressing a gathering of the New York Society of Security Analysts in 1980, Dean Watkins conveyed as much with his closing remarks, stating "we are pleased at the President's perception, albeit belated, of the dangerous and rapidly growing strength of the Soviet Union."

Watkins would find a greater ally in Ronald Reagan, who assumed the presidential post in 1981, then presided over the country during a two-term presidency that included major increases in defense spending. The 1980s were robust years of growth for defense-oriented companies, Watkins-Johnson included, as the pressing need to outmatch the Soviet Union in military might fostered widespread growth throughout the company's key markets. Despite the vitality of the defense industry during the Reagan Administration, Watkins-Johnson initiated a significant shift in its business mix during the decade that would begin to steer the company away from its heavy involvement in the electronic warfare market, marking the beginning of a new era of business for a firm long-reliant on the vagaries of defense spending.

The diversification away from military markets, subtle at first, began when W. Keith Kennedy, a Watkins-Johnson employee since 1968, took over management of the company in 1988. With Kennedy at the helm and Watkins and Johnson occupying the posts of chairman and vice-chairman, respectively, the company gradually began to shift its emphasis away from defense electronics to systems for making semiconductor wafers. In the years ahead, Watkins-Johnson would become a leading supplier of chemical-vapor-deposition (CVD) systems to semiconductor manufacturers, developing equipment that deposited layers of nonconducting dielectrics onto silicon wafers.

However, the road toward becoming a leading supplier of CVD systems was a difficult one, draining Watkins-Johnson's sales volume. When Kennedy was named president in 1988, the company derived 90 percent of its $280 million in revenues from defense-related products, a percentage that would decline as the company slowly shifted its focus toward the computer chip market and defense spending began declining. Exacerbating Watkins-Johnson's woes during its signal transition was the onset of a nationwide economic recession during the early 1990s, forcing the company to reduce its work force from 3,200 to 2,400 and to close a plant in North Carolina in 1991.

Recovery was on the way by 1993, however, bolstering the company's position as it intensified its efforts to shed its image as a defense contractor. In April 1993, as part of its plan to more aggressively pursue commercial business, Watkins-Johnson renamed its two divisions, giving its Defense Group the new title Electronics Group and changing the name of its Commercial Group to Semiconductor Equipment Group.

By the mid-1990s, the efforts invested in developing new markets for the company were beginning to pay large dividends. The demand for CVD equipment was skyrocketing, propelled by the enormous growth of the computer industry since Kennedy began deepening the company's involvement in the chip market in 1988. Watkins-Johnson's semiconductor equipment sales were up 50 percent in 1995, contributing $220 million in annual sales, or 60 percent of the company total volume. Although the company's semiconductor equipment group represented its main business during the mid-1990s, ranking as the third-largest producer of CVD systems in the world, Watkins-Johnson was not abandoning defense electronics entirely. Instead, the company was adapting its military signal-processing expertise to wireless communications equipment and still taking on defense work, including a $16 million Hughes Aircraft Co. contract awarded in October 1995 for part of the Advanced Medium Range Air-to-Air Missile's radar system.

As Watkins-Johnson charted its course for the late 1990s and the 21st century, the company was constructing many of its future plans around its fast-growing semiconductor equipment business. In May 1995, the company sold its microwave electronics unit to Condor Systems Inc., freeing up manufacturing space at its San Jose facility for semiconductor equipment production. Further strengthening of its involvement in the computer ship business was expected during the late 1990s, as Watkins-Johnson focused its efforts on developing a dominant position in a market that promised substantial growth for the company in the future.